Fayrewood Share Discussion Threads

[deswalker] 27/3/2008 21:06

Some nice analysis scburbs. Don't know whether it's right or not but it looks like sound enough reasoning to me :-)

[deswalker] 27/3/2008 21:03

SteMis,

I agree that the accounts are a bit contradictory.

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One line of argument goes ...

For the year ending 31/12/06 the Financial liabilities line breaks down as follows ...

Current Instalment due on loans = 346 (1%)
Bank Overdrafts = 2853 (8%)
Trade Receivables Finance = 32654 (91%)

Financial liabilities = 35853 (100%)

and so your concerns focus solely on whether Trade Receivables Finance should be regarded as Debt. But this liability sits against the Trade and Other Receivables line within Current Assets so it doesn't seem fair to include it with the traditional interest bearing debt used in Net Debt calculations.

Indeed for the year ending 31/12/07 it may just be the case that Trade Receivables Finance forms 100% of Financial liabilities in which case the calculation of Net Debt would simply be Cash Balance minus zero = Cash Balance. Obviously we don't have the Notes to the accounts yet so we can't be sure this is the case.

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The other argument goes ...

Why in Note 14 of the AR for the year to 31/12/06 has Trade Receivables Finance been included in the Net Debt calculation when it hasn't been included for the results released today ?

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I can see both points of view but personally I believe the first argument is correct and I don't know why they do what they do in Note 14 of the accounts. I know we've been here before but I thought it worth laying out the argument once again.

Des

[scburbs] 27/3/2008 20:15

Looking at a downside case. If Interface needs to be funded £9m equity and £9m debt and the discount to NAV is 30% on a sale of Interface and a 2.5% discount on cash would give a fair price of 142.5p

As stated previously I suspect a price of 140-150p is the right takeout price. This represents a premium of 19-27% over 118p (and a much higher IRR given this should be sorted in under 3 months)

[scburbs] 27/3/2008 20:12

The key to valuing FWY in my view is to work out how much of the cash is surplus.

The way to calculate this is to look at Interface Solutions Ltd. Interface has equity/NAV of around £3m per statutory accounts. This means that £33.4m of the current NAV is surplus.

Unfortunately it is not as simple as that as Interface can probably only operate with £3m of equity because of the shareholder loans and other support provided by its parent.

Therefore, we need to work out how Interface should be funded as a stand alone company. Its financing requirement is roughly:

Trade Debts £27.9m
Stock £13.2m
Trade Creditors £(23.1)m
Net financing £18m

Currently this is being funded £3m equity, £15m debt.

On a stand alone basis a more appropriate split might be £6m equity, £12m debt. With £27.9m of receivables it should be relatively easy to secure £12m of borrowings without parental support as it is less than 50% of the debtor book.

This would then mean that the appropriate FWY valuation is:

Surplus assets £30.428m (£1.31 per share)
Interface £6m NAV (26p per share)

I would suspect Interface would sell at a discout to NAV, say 20% (Banque Magnetique sold for NAV and was a better business). This makes a reasonable take out price just over £1.50.

[stemis] 27/3/2008 19:59

I'm not sure I exactly understand your question.

I don't have any particular concern over working capital. My question related to valuation. Despite what some might believe I don't have any particular downer on FWY. I've owned the stock 3 times and I think I've made money each time. The only reason I would own it at the moment is on the basis of the takeover/cash distribution exit giving me a quick and low risk 20% or so. I was alerted to the possibility that this might exist by scburbs post of yesterday. I tried to work out what the proforma cash position might look like after the various sales but decided to what until the results today.

Although FWY claim in their narrative that the net cash is £33.1m (143p per share)it looks to me like that is gross cash and that net cash is £17.9m (77p per share). That makes a big difference to me because if it was the former then they could literally give Interface away and still return enough cash to shareholders to yield an easy 20% on the current share price. However if it is the latter then they need to get £9.5m (41p per share) for Interface just to justify the current share price.

Now we can argue about the possibility of selling Interface with its debt and the impact that might have on valuation. I don't think Interface is a particularly valuable asset and one might struggle to sell it with the debt. You probably disagree. Its pointless having the debate, especially if it involved the nature of debt which has been debated over and over again. However the two scenarios outlined are quite different which is why I was interested in what the net debt really is.

Hope that explains somewhat.

[bhoddhisattva] 27/3/2008 16:05

Stemis: you've always been very reserved or cautious in your view of the debt on FWY - and been at odds with some on this as a result.

Given the rapid turnover and nature of the stock and business; what exactly is the root of your concern about this working capital approx = to stock?

[deswalker] 27/3/2008 11:19

I agree aquilla. In normal markets this would be higher but most people (me included) are that punch-drunk that they find it hard to push the buy button on anything. I've been on a buyer's strike myself for quite a while but I forced myself to add a few FWY this morning when you could buy at under 116p following those results and that statement of intention. Just a matter of patience now.

I liked the mention of a tax efficient return. Personally I really hope it's a B share scheme giving people the option of Income or Capital Gain and not another Tender Offer where it's CGT only. Other smaller companies have recently done B share schemes so it's not confined to the large caps.

[aquilla] 27/3/2008 11:08

I'm amazed that this isn't higher. On fundamentals alone this is cheap. But when you add in the bid situation as well I would have thought the share price would be at least 140p.
IMHO

[etarip] 27/3/2008 09:40

Bought 4,000 at 116 not a sale.

If you take from the Net book assets 36,428,000 the cash of 33,097,000 you are left with 3,331,000 and a business making an operating profit of 696,000. This must be worth more than 3,331,000. Therefore proceeds from a sale of the company IMHO should be worth more than net asset value.

[scburbs] 27/3/2008 08:57

SteMiS, Agreed this is misleading. However, as a working capital intensive business, Interface should have debt to cover the working capital. Therefore, the £33.1m could really be returned to shareholder (other than the restrictions due to indemnities/IBM debenture etc.).

In essence this amount is surplus to the requirements of the business.

[stemis] 27/3/2008 08:54

The company state in the narrative that net cash is £33.1m, however the balance sheet shows cash of £33.1m and financial liabilities of £15.2m

[balcony] 27/3/2008 08:44

Well just bought a further 25k shares as this looks as safe as you can get in these markets.

[scburbs] 27/3/2008 08:20

Morning DesWalker,

They certainly could. I imagine they might retain slightly more cash than they need though and they do still have some restricted cash.

Perhaps they might purchase say 15m shares at £1.40 at a cost of £21m. This would leave the remaining company with far too much cash at £12.1m, but importantly the TNAV of the remaining business would then be £1.88 (including £1.48 cash per share)!

Most likely outcome IMV is a takeover at a slight discount to TNAV in the £1.40-£1.50 region.

Excellent return for very low risk to be had in FWY. Cash return or takeout.

Annualised IRR for a takeout in 3 months at £1.40 is over 80%.

[deswalker] 27/3/2008 08:08

Yes, very happy with the results. As a worst case scenario they could comfortably give us at least the current share price back in cash and we'd be left with a growing company with net cash and a discount to TBV for free.

[scburbs] 27/3/2008 07:38

Cash balances at 31 December 2007 were £1.43 per share. NTAV £1.56 per share.

Current share price of £1.145 is 20% discount to cash balances and 27% discount to NTAV. Far too high when the company is either to be taken over or return further cash to shareholders.

[scburbs] 27/3/2008 07:34

Additional €0.5m cash from Banque Magnetique sale looks like it has been secured.

"in late December 2007, we completed the sale of Banque Magnetique for €12.5
million, €0.5 million of which will be paid on 30 June 2008. Our consolidated
accounts incorporate the results of Banque Magnetique to the date of completion."

[scburbs] 27/3/2008 07:32

The most important bit of the results. It is either a takeover or cash back.

"In November 2007, we were approached by our largest shareholder, North Atlantic Value LLP, in relation to a possible offer for the Group. This proposal is still under discussion and the Board will update shareholders when we reach a more definitive position. As with all such discussions, there can be no certainty of its outcome. However, in the event that no such offer is received from North Atlantic Value, the Board will explore other tax efficient methods of returning cash to shareholders."

[aquilla] 26/3/2008 18:17

What you say sounds reasonable, scurbs. The margins are pretty slim here: but then I suppose so they are with the supermarket chains. They of course have the benefit of scale and room for expansion.
Anyway, good luck to all holders tomorrow. When BIO announced their results, they announced the agreed offer by NAV at the same time. Wonder if it will be the same with FWY: an announcement is long overdue!

[dangersimpson2] 26/3/2008 10:43

I agree scburbs. Its also in the interests of North Atlantic Value to do this deal sooner rather than later since the longer they wait the lower their IRR from this deal will be. Here's hoping tomorrow's results provide some form of catalyst!

[scburbs] 26/3/2008 10:26

I have added today and yesterday on expectation of further announcements on the takeover or a further return of surplus cash.

North Atlantic Value LLP have c.25% of the company. My expectation is that they have built this stake to realise a profit from the discount to TNAV. They can't realise the profit whilst the company remains listed (and trading at a large discount to TNAV) so they either need to take it over or for the company to return further cash.

I could be wrong, but I don't believe they invested because of a great belief in the Interface business, so I expect they would strongly resist any significant acquisitions. The sooner this company is off the stock market (at an appropriate valuation!) the better (same goes for their competitor Northamber, but even more so for Northamber!).

A company with lots of cash and a broadly break even/low profitability company with limited growth prospects (based on its track record over a number of years) has no real reason for being listed.

[aquilla] 22/3/2008 22:06

I'm not unduly worried that the share price isn't jumping from 116p. I was in BIO previously. The share price initially went to over 30p on the news then drifted down to the low 20's before collapsing to 10p. It recovered to 15p and a couple of weeks later a recommended offer was announced at 30p. The company taking them over?......NAV! Of course every situation is different but we should learn more next week with the results. Using their cash to buy another company? Somehow I doubt it.

[etarip] 21/3/2008 13:49

betman:

You are missing the accouts due to be reported on 27 March for the year ending 31.12.2007 and also knowing the intentions of the directors. There is nothing to stop them using the cash to buy another company. See also the Investors Chronicle article (page 65) dated 19 October 2007 on this company.

[betman] 20/3/2008 15:05

I understand this company is now mainly cash, about 140 -150p per share, and a small Systems business. Why isnt everyone jumping in to buy to 116p ? I would have thought cash in the bank was rather nice in these uncertain times ?? What am I missing ?

[swiftnick] 20/3/2008 09:33

Hopefully Thursday's results will confirm that Banque Magnetique's profit before interest, tax, employee participation entitlements and Group charges for the year ended 31 December 2007 was not less than €5.547 million. This would mean that the balance of the sales consideration of €0.5 million will be paid to FWY on 30 June 2008, thereby removing one of the uncertainties.

[aquilla] 19/3/2008 12:51

This must be one of the quietest threads on ADVFN and yet we are in a takeover situation!
Results just announced for next week (27th March):


We should see an update on the takeover talks as well. It has been nearly four months since the original announcement. The only other announcement since that time was the confirmation of North Atlantic Value as the interested party. Time for some decisions!